Last week, the latest data showed U.S. real GDP back above its pre-pandemic level. The recovery has been twice as fast as the one from the Great Financial Crisis. But what makes it all the more remarkable is that this was accomplished with around half a million new recorded cases of COVID-19 worldwide every day—a trend as bad as it was back in October 2020.
The culprit is the Delta variant of the coronavirus, as well as low vaccination rates globally.
Rising volatility in risk markets and record-low Treasury real yields suggest growing investor concern that this could jeopardize the economic recovery.
The Delta variant replicates more efficiently, which means that, compared to the first wave of the disease, infected individuals “shed” around 1,000 times more viral particles when they cough, sneeze and talk. That makes each carrier likely to infect as many as five other people, on average, as well as infect individuals more quickly when in close proximity.
Since it was first identified in India late last year, the Delta variant has gone on to account for the majority of current infections in most countries around the world and virtually all of them in the U.K. In the U.S. it was unknown before early May, but now accounts for more than 80% of cases—which are growing by more than 70,000 a day and rising.
In response, the U.S. Centers for Disease Control and Prevention (CDC) has reversed course on face masks, recommending that even vaccinated people should wear them in certain areas of the country. Some local authorities are contemplating renewed mandates for mask wearing, social distancing and other restrictions. We are seeing tightening restrictions in countries such as Australia, Japan, South Korea, Indonesia and Vietnam.
This would be pretty disheartening, 18 months into the pandemic, were it not for the fact that these places—U.S. regions contemplating restrictions, Asia, Australia—all share one thing in common: They are lagging with their vaccination rollouts.
The effectiveness of vaccinations is the reason U.S. real GDP is back to pre-crisis levels amid this still-raging pandemic. (It’s also the reason the International Monetary Fund cut its 2021 growth forecasts for under-vaccinated emerging economies last week, even as it raised its forecast for developed economies.)
It is early days, but while the data suggest that vaccines are only 60 – 70% effective in preventing infection against the Delta variant, they appear to be around 90% effective in preventing severe COVID-19, hospitalization or worse. In the U.S., 97% of current hospitalizations are among the unvaccinated, and 99.5% of deaths.
This is where the U.K. could be a vitally important test case.
It has given 88% of its adults their first shot and 71% their second. Ninety-five percent of over-65s have had second shots. That appears to have weakened, or even broken, the link between infections and hospitalizations. The recent new-infections rate of 35,000 to 45,000 a day was not far off the very worst weeks of the U.K.’s crisis last winter. Back then, there were almost 40,000 COVID-19 patients in hospital. Today, there are barely 6,000.
And last week brought more potentially encouraging news from the U.K. While the exact cause is still puzzling scientists, by last Thursday, the seven-day average of daily new infections had plummeted by almost 40% from its recent peak on July 18. Hot weather, school holidays and a high number of test-and-trace isolation notices may have played a part, but one tantalizing possibility is that runaway infections and a high proportion of vaccination have combined to create herd immunity to suppress the virus, at a very low cost in hospitalizations and deaths—assuming herd immunity is possible at all.
For the U.S., a modest increase in the current rate of vaccination (which we think may occur due to concerns over this new variant) combined with the CDC’s projected rate of new infections could bring it to that same point in a few months or so. If new infections continue to rise and plateau at around 100,000 per day, coupled with an increase in daily vaccinations back to more than 750,000 per day, we think the moment could come within about three to four months, if not sooner.
Slow Yet Steady Progress
The coming days are critical. They will reveal the impact of the U.K.’s lifting of restrictions on July 19, and last week’s decision to open borders to vaccinated arrivals from Europe and the U.S. But it now seems increasingly unlikely that policymakers in countries with high levels of vaccination would reintroduce stringent restrictions to protect the small minority that have chosen to refuse them.
For that reason, we think those economies will continue to reopen, against a backdrop of accommodative monetary and fiscal policy, and that those GDP numbers and corporate earnings will continue to grow.
Considerable risks remain. Global vaccination rates remain low, particularly in the emerging world, and the contagiousness of the Delta variant makes it still more difficult to control. The possibility that it evolves quickly or spawns a new variant that is more resistant to current vaccines is therefore very real. Rolling out the shots worldwide should be an urgent priority. Even in well-vaccinated populations, it could soon be time to administer booster shots to maintain immunity levels, at the very least in the elderly and immune-compromised.
These are among the reasons why markets have been “choppy and difficult” over recent weeks, in line with what we anticipated in our most recent Asset Allocation Committee Outlook. At current levels of valuation and uncertainty, we think they are likely to remain so. But we see clear signs that vaccination can both break the link between coronavirus infections and widespread severe illness and eventually facilitate potential herd immunity. Our slow yet steady progress out of this crisis, and toward potential herd immunity, is on the horizon.
In Case You Missed It
- Japan Purchasing Managers’ Index: -0.2 to 52.2 in June
- U.S. New Home Sales: -6.6% to SAAR of 676,000 units in June
- U.S. Durable Goods Orders: +0.8% in June (excluding transportation, durable goods orders increased 0.3%)
- S&P Case-Shiller Home Price Index: May home prices increased 2.1% month-over-month and increased 17.0% year-over-year (NSA); +1.8% month-over-month (SA)
- U.S. Consumer Confidence: +0.2 to 129.1 in July
- Federal Open Market Committee Meeting: The FOMC made no changes to its policy stance
- U.S. 2Q 2021 GDP (Second Preliminary): +6.5% annualized rate
- U.S. Initial Jobless Claims: +400,000 for the week ending July 24
- Eurozone 2Q 2021 GDP (Preliminary): +2.0 quarter-over-quarter
- Eurozone Consumer Price Index: +2.2% in July year-over-year
- U.S. Personal Income and Outlays: Personal spending increased 1%, income increased 0.1%, and the savings rate decreased to 9.4% in June
What to Watch For
- Monday, August 02:
- ISM Manufacturing Index
- Wednesday August 04:
- ISM Non-Manufacturing Index
- Thursday August 05:
- U.S. Initial Jobless Claims
- Friday August 06:
- U.S. Employment Report